Monday, March 25, 2013

Profit and Opportunity Cost

The New York Times reports that manufacturing is making a comeback here in the US, and gives a unique look at the difference between accounting profits and economic profits.  Notice in the article that Revere Cooper Products is making about $1 million annually in accounting profit, but if the company were to shut down and sell their assets and move the company overseas that the owner could make between $35 and $40 million.  Hence the opportunity cost is the difference between shutting down and selling and retaining ownership.  If the decision was only based on economics, we would expect the owner to shut-down and sell the firm; but given that the company was started by Paul Revere, this might have some difficulties elsewhere.

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